UK Economy
UK profit warnings reach highest first half total since 2011
By Michael Hennigan, Finfacts founder and editor
Jul 28, 2014 - 7:14 AM

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UK profit warnings from listed companies in the first half of this year have been at the highest since 2011, and despite the recovery, stagnant real earnings and the rising value of sterling are key factors.

The companies issued 137 warnings in the first six months of 2014, up 9% on the same period of last year and the highest first half total since 2011, according to EY’s latest Profit Warnings report - -  EY used to be known as Ernst & Young, the professional services firm.

There were 63 profit warnings in Q2 2014, nine more than the same quarter of 2013, but down by 11 when compared with the previous quarter.

Pricing and competitive pressures are clearly affecting businesses in 2014. In the first half of the year, 19% of profit warnings cited competitive or pricing pressures, compared with 7% in 2013. Adverse currency movements triggered over a fifth of profit warnings in the first half of 2014, compared with just 3% last year.

Consumer goods manufacturers in particular find themselves in the crossfire of pricing, currency and competitive pressures. The percentage of companies warning in FTSE Consumer Goods sectors has almost doubled, from 9% in the first half of 2013 to 16% over the same period this year.

The percentage of companies issuing profit warnings also rose year-on-year from 3.8% in Q2 2013 to 4.4% in Q2 2014.

FTSE sectors issuing the highest number of profit warnings in Q2 2014 were Support Services (7), Software & Computer Services (7), Household Goods (4) and Electronic & Electrical Equipment (4).

“The UK economy’s growing, but it’s changing,” said Mark Gregory, chief economist for the UK and Ireland at EY. He highlighted that the UK’s stagnant real wage growth as a key reason for the success of low-cost retailers such as Germany's Aldi and Lidl, which last week resulted in the ouster of Philip Clarke, Tesco's chief executive.

Keith McGregor, EY’s capital transformation leader for Europe, Middle East, India and Africa, said: “For UK plc, the improvement in domestic demand has been a welcome fillip and this growth rests on a broader base than 2013, encompassing a rise in investment as well as consumption. However, translating this into profitable growth remains more problematic.

“The pounds rapid rise is one of the biggest pressures on earnings. Although, the problem highlighted in profit warnings isn’t one of sales but of currency translation. Recent history shows that UK exports are relatively insensitive to currency effects. However, the pound’s leap to multi-year highs has caught out a number of companies who translate foreign earnings back into pounds.”

Continuing, he added: “Price and competition pressures have also intensified. While the recovery has boosted demand, it hasn’t eradicated the austerity mind-set of businesses or consumers. Moreover, the low level of insolvencies means companies are competing in packed and competitive market place, lowering the normal level of returns.”

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